IN THE SUPREME COURT OF THE STATE OF DELAWARE

§ No. 564, 2014

IN RE CORNERSTONE §

THERAPUTICS INC, § Court Below:

STOCKHOLDER LITIGATION § Court of Chancery of the State

§ of Delaware

§

§ C.A. No. 8922-VCG

________________________________________________________________________

RAYMOND LEAL, YAOGUO PAN, §

and XIAOSONG HU, §

§ No. 706, 2014

§

Defendants Below-Appellants, § Court Below:

§ Court of Chancery of the State

v. § of Delaware

§

PHILLIP MEEKS, ERNESTO § C.A. No. 7393-VCN

RODRIGUEZ, and ALAN HALL, §

§

Plaintiffs Below-Appellees. §

Submitted: May 6, 2015

Decided: May 14, 2015

Before STRINE, Chief Justice; HOLLAND and VAUGHN, Justices; and BUTLER and

CLARK, Judges.

Upon appeal from the Court of Chancery. REVERSED.

Donald K. Wolfe, Jr., Esquire, Kevin R. Shannon, Esquire, Christopher N. Kelly,

Esquire, Potter Anderson & Corroon LLP, Wilmington, Delaware, for Defendants

Below-Appellants Michael Enright, Christopher Codeanne, James A. Harper, Michael

Heffernan and Laura Shawver; Kurt Heyman, Esquire, Dawn Kurtz Crompton, Esquire,

Proctor Heyman LLP, Wilmington, Delaware, for Defendants Below-Appellants Craig A.

Collard and Robert M. Stephan; Anthony M. Candido, Esquire (Argued), Robert C.

Myers, Esquire, John P. Alexander, Esquire, Clifford Chance US LLP, New York, New

York, for Defendants Below-Appellants in In re Cornerstone Therapeutics Inc.

Stockholder Litigation.

Sitting by designation under Del. Const. art. IV, § 12.

Seth D. Rigrodsky, Esquire, Brian D. Long, Esquire, Gina M. Serra, Esquire, Jeremy J.

Riley, Esquire, Rigrodsky & Long, P.A., Wilmington, Delaware; J. Brandon Walker,

Esquire, Melissa A. Fortunato, Esquire, Kirby McInerney LLP, New York, New York;

Shane Rowley, Esquire, Levi & Korsinsky LLP, New York, New York; Chet B.

Waldmann, Esquire (Argued), Joshua H. Saltzman, Esquire, Wolf Popper LLP, New

York, New York, for Plaintiffs Below-Appellants Edwin Myruski, James Parker, Daniel

Blaschak, and David Julier, in In re Cornerstone Therapeutics Inc. Stockholder

Litigation.

S. Mark Hurd, Esquire (Argued), Matthew R. Clark, Esquire, Thomas P. Will, Esquire,

Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware; Robert H. Pees, Esquire,

Akin Gump Strauss Hauer & Field LLP, New York, New York, for Defendants Below-

Appellants Raymond Leal, Yaoguo Pan, and Xiaosong Hu.

Seth D. Rigrodsky, Esquire (Argued), Brian D. Long, Esquire, Gina M. Serra, Esquire,

Jeremy J. Riley, Esquire, Rigrodsky & Long, P.A., Wilmington, Delaware; Donald J.

Enright, Esquire, Levi & Korinsky LLP, Washington, DC; Gustavo F. Bruckner, Esquire,

Ofer Ganot, Esquire, Pomerantz LLP, New York, New York, for Plaintiffs Below-

Appellees Phillip Meeks, Ernesto Rodriguez, and Alan Hall.

STRINE, Chief Justice:

1

I. INTRODUCTION

These appeals were scheduled for argument on the same day because they turn on

a single legal question: in an action for damages against corporate fiduciaries, where the

plaintiff challenges an interested transaction that is presumptively subject to entire

fairness review, must the plaintiff plead a non-exculpated claim against the disinterested,

independent directors to survive a motion to dismiss by those directors?1 We answer that

question in the affirmative. A plaintiff seeking only monetary damages must plead non-

exculpated claims against a director who is protected by an exculpatory charter provision

to survive a motion to dismiss, regardless of the underlying standard of review for the

board‘s conduct—be it Revlon,2 Unocal,

3 the entire fairness standard, or the business

judgment rule.

The Court of Chancery in both of these cases denied the defendants‘ motions to

dismiss because it read the precedent of this Court to require doing so, regardless of the

exculpatory provision in each company‘s certificate of incorporation. Under the Court of

Chancery‘s analysis, even if the plaintiffs could not plead a non-exculpated claim against

any particular director, as long as the underlying transaction was subject to the entire

fairness standard of review, and the plaintiffs were therefore able to state non-exculpated

claims against the interested parties and their affiliates, all of the directors were required

1 We have consolidated these appeals for the purpose of issuing one consistent answer to the

single question they pose. 2 See Revlon v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986).

3 See Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985).

2

to remain defendants until the end of litigation. The Court of Chancery was reluctant to

embrace that result but felt that it was the reading most faithful to our precedent.

In this decision, we hold that even if a plaintiff has pled facts that, if true, would

require the transaction to be subject to the entire fairness standard of review, and the

interested parties to face a claim for breach of their duty of loyalty, the independent

directors do not automatically have to remain defendants. When the independent

directors are protected by an exculpatory charter provision and the plaintiffs are unable to

plead a non-exculpated claim against them, those directors are entitled to have the claims

against them dismissed, in keeping with this Court‘s opinion in Malpiede v. Townson4

and cases following that decision.5 Accordingly, we remand both of these cases to allow

the Court of Chancery to determine if the plaintiffs have sufficiently pled non-exculpated

claims against the independent directors.

II. BACKGROUND

These appeals both involve damages actions by stockholder plaintiffs arising out

of mergers in which the controlling stockholder, who had representatives on the board of

directors, acquired the remainder of the shares that it did not own in a Delaware public

corporation.6 Both mergers were negotiated by special committees of independent

4 See Malpiede v. Townson, 780 A.2d 1075, 1094 (Del. 2001).

5 See, e.g., In re Morton’s Rest. Grp., Inc. S’holders Litig., 74 A.3d 656 (Del. Ch. 2013); see also

DiRienzo v. Lichtenstein, 2013 WL 5503034 (Del. Ch. Sept. 30, 2013); In re S. Peru Copper

Corp. S’holder Derivative Litig., 52 A.3d 761 (Del. Ch. 2011), aff’d sub nom., Americas Mining

Corp. v. Theriault, 51 A.3d 1213 (Del. 2012). 6 These cases are In re Zhongpin Inc. S’holders Litig. and In re Cornerstone Therapeutics Inc.

S’holder Litig. In Zhongpin, Xianfu Zhu, the controlling stockholder, CEO and Chairman of the

Board of Zhongpin Inc., a publicly-traded Delaware corporation engaged in meat and food

processing, purchased the outstanding shares he did not own through a going-private merger that

3

directors, were ultimately approved by a majority of the minority stockholders, and were

at substantial premiums to the pre-announcement market price.7

Nonetheless, the

plaintiffs filed suit in the Court of Chancery in each case, contending that the directors

had breached their fiduciary duty by approving transactions that were unfair to the

minority stockholders.

In both appeals, it is undisputed that the companies did not follow the process

established in Kahn v. M&F Worldwide Corporation as a safe harbor to invoke the

business judgment rule in the context of a self-interested transaction.8 Thus, the entire

fairness standard presumptively applied, although the burden of persuasion on that issue

closed on June 27, 2013. Before the merger, Zhu owned only 17.3% of the company, but the

Court of Chancery determined that the plaintiffs had raised an inference that Zhu held a

controlling interest because of his level of control over the management and operations of the

company. 2014 WL 6735457, *8 (Del. Ch. Nov. 26, 2014) [hereinafter Zhongpin]. In

Cornerstone, Chiesi Farmaceutici S.p.A., a privately-held drug maker headquartered in Parma,

Italy, acquired all of the stock that it did not own in Cornerstone Therapeutics Inc., a public

Delaware pharmaceutical company. Before the merger, Chiesi was the beneficial owner of

65.4% of Cornerstone common stock. 2014 WL 4418169, *2 (Del. Ch. Sept. 10, 2014)

[hereinafter Cornerstone]. For purposes of these appeals, none of the parties in either case

dispute the Court of Chancery‘s determination that the entire fairness standard of review

presumptively applies because the going-private transaction at issue involved a controlling

stockholder. Nothing in this opinion should be construed as our own evaluation of these issues.

Rather, we simply accept that this is the premise on which the common question presented to us

in these appeals rests. 7 Zhu acquired the remaining Zhongpin stock for $13.50 per share in cash, a 47% premium over

the closing price of the company‘s stock the day before the announcement of Zhu‘s proposal.

See App. to Zhongpin Opening Br. at 63. Chiesi acquired the remaining Cornerstone stock it did

not own for $9.50 per share in cash, a 78% premium over the closing price on the date that

Chiesi delivered its offer letter to the board. See App. to Cornerstone Opening Br. at 89. 8 88 A.3d 635, 644 (Del. 2014) (―We hold that business judgment is the standard of review that

should govern mergers between a controlling stockholder and its corporate subsidiary, where the

merger is conditioned ab initio upon both the approval of an independent, adequately-

empowered Special Committee that fulfills its duty of care; and the uncoerced, informed vote of

a majority of the minority stockholders.‖).

4

might ultimately rest with the plaintiffs.9 In both cases, the defendant directors were

insulated from liability for monetary damages for breaches of the fiduciary duty of care

by an exculpatory charter provision adopted in accordance with 8 Del. C. § 102(b)(7).

Despite that provision, the plaintiffs in each case not only sued the controlling

stockholders and their affiliated directors, but also sued the independent directors who

had negotiated and approved the mergers.

In the first of these cases to be decided, In re Cornerstone Therapeutics Inc.

Stockholder Litigation, the independent director defendants moved to dismiss on the

grounds that the plaintiffs had failed to plead any non-exculpated claim against them.10

The independent directors argued that although the entire fairness standard applied to the

Court of Chancery‘s review of the underlying transaction, and thus the controlling

stockholder and its affiliated directors were at risk of being found liable for breaches of

the duty of loyalty, the plaintiffs still bore the burden to plead non-exculpated claims

against the independent directors.11

The independent directors noted that this Court held

in Malpiede v. Townson that, in the analogous context of review under the Revlon

standard, plaintiffs seeking damages must plead non-exculpated claims against each

individual director or risk dismissal.12

The independent directors also pointed out that in

9 See id. at 653-4; see also Kahn v. Lynch Commc’n Sys., Inc., 638 A.2d 1110 (Del. 1994).

10 Cornerstone, 2014 WL 4418169, at *5.

11 See id.

12 780 A.2d 1075, 1083-84 (Del. 2001) (―Although the Revlon doctrine imposes enhanced

judicial scrutiny of certain transactions involving a sale of control, it does not eliminate the

requirement that plaintiffs plead sufficient facts to support the underlying claims for a breach of

fiduciary duties in conducting the sale.‖); id. at 1094 (―The plaintiffs are entitled to all

reasonable inferences flowing from their pleadings, but if those inferences do not support a valid

legal claim, the complaint should be dismissed without the need for the defendants to file an

5

a number of cases, including several affirmed by this Court, the Court of Chancery

dismissed claims against independent directors when the plaintiffs failed to plead non-

exculpated claims for breaches of fiduciary duty, notwithstanding the applicability of

entire fairness review to the transaction.13

In response, the plaintiffs argued that the Court of Chancery could not grant the

independent directors‘ motion to dismiss, regardless of whether they had sufficiently pled

non-exculpated claims.14

Under their reading of language in two of the four decisions

issued by this Court in the extensive Emerald Partners litigation,15

the plaintiffs

contended that they could defeat the independent directors‘ motions to dismiss solely by

establishing that the underlying transaction was subject to the entire fairness standard.16

In the first of the two relevant Emerald Partners decisions (―Emerald I‖), this Court

determined that the plaintiffs had sufficiently pled duty of loyalty claims against the

answer and without proceeding with discovery. Here we have assumed, without deciding, that

the amended complaint on its face states a due care claim. Because we have determined that the

complaint fails properly to invoke loyalty and bad faith claims, we are left with only a due care

claim. Defendants had the obligation to raise the bar of Section 102(b)(7) as a defense, and they

did. As plaintiffs conceded in oral argument before this Court, if there is only an unambiguous,

residual due care claim and nothing else—as a matter of law—then Section 102(b)(7) would bar

the claim. Accordingly, the Court of Chancery did not err in dismissing the plaintiffs due care

claim in this case.‖). 13

See, e.g., DiRienzo v. Lichtenstein, 2013 WL 5503034 (Del. Ch. Sept. 30, 2013); In re S. Peru

Copper Corp. S’holder Derivative Litig., 52 A.3d 761 (Del. Ch. 2011), aff’d sub nom., Americas

Mining Corp. v. Theriault, 51 A.3d 1213 (Del. 2012); In re Fredericks of Hollywood, Inc., 2000

WL 130630 (Del. Ch. 2000), aff’d sub nom., Malpiede v. Townson, 780 A.2d 1075 (Del.

2001); In re Lukens Inc. S’holders Litig., 757 A.2d 720 (Del. Ch. 1999); In re Gen. Motors Class

H S’holders Litig., 734 A.2d 611 (Del. Ch. 1999). 14

Cornerstone, 2014 WL 4418169, at *6. 15

See Emerald Partners v. Berlin, 840 A.2d 641 (Del. 2003); Emerald Partners v. Berlin, 787

A.2d 85 (Del. 2001) [hereinafter Emerald II]; Emerald Partners v. Berlin, 726 A.2d 1215 (Del.

1999) [hereinafter Emerald I]; Emerald Partners v. Berlin, 552 A.2d 482 (Del. 1988). 16

See Cornerstone, 2014 WL 4418169, at *6.

6

disinterested directors that were ―intertwined‖ with their duty of care claims.17

In the

second of the two decisions (―Emerald II‖), this Court stated that ―when entire fairness is

the applicable standard of judicial review, a determination that the director defendants are

exculpated from paying monetary damages can be made only after the basis for their

liability has been decided,‖ on a fully-developed factual record.18

The Cornerstone

plaintiffs argued that this language in Emerald II should be read broadly to require the

court to deny independent directors‘ motions to dismiss whenever the applicable standard

of review is entire fairness.19

Although the Court of Chancery suggested that it believed

that the defendants‘ view of the law was the preferable one,20

it nonetheless concluded

that it was bound to deny the motion because its reading of the Emerald II decision was

the one advocated by the plaintiffs.21

In In re Zhongpin Stockholders Litigation, the independent director defendants

also argued that the claims against them should be dismissed because the plaintiffs had

17

Emerald I, 726 A.2d at 1218. The Court found the following facts alleged by the plaintiffs to

be relevant in determining that the defendants‘ motion for summary judgment should be denied:

―i) [the inside directors‘] improper participation in the deliberations of the ‗non-affiliated‘

directors; ii) [the controlling director‘s] improper contact with [the investment advisor,] Bear

Stearns; iii) the complete lack of negotiation of the exchange ratio; iv) the utter disregard for the

committee process; and v) the failure to seek an updated fairness opinion.‖ Id. at 1220 n.5

(internal quotation marks omitted). 18

Emerald II, 787 A.2d at 94. 19

See Cornerstone, 2014 WL 4418169, at *6. 20

See id. at *10 (―There is much, in my view, to recommend [a particularized] pleading

requirement [for independent directors]. It is consistent with our treatment of directors alleged to

have breached duties in non-controller-dominated transactions, where the requirement of specific

pleading of non-exculpated breaches of duty allows management of the corporation to proceed

unaffected by frivolous litigation and protects the directors‘ ability to pursue appropriate levels

of risk without fear of liability, so long as their actions are consistent with the duty of loyalty.‖). 21

See id. at *12.

7

failed to plead any non-exculpated claims.22

The Court of Chancery in Zhongpin

deferred to Cornerstone‘s interpretation of precedent23

and held that the claims against

the independent directors survived their motion to dismiss ―regardless of whether the

Complaint state[d] a non-exculpated claim‖ because the transaction was subject to entire

fairness review.24

In each case, the Court of Chancery did not analyze the plaintiffs‘ duty of loyalty

claims against the independent directors because it determined that it was required to

deny their motions to dismiss regardless of whether such claims had been sufficiently

pled.25

But, recognizing the important and uncertain issue of corporate law at stake, the

Court of Chancery in each case recommended certification of an interlocutory appeal to

this Court to determine whether its reading of precedent was correct.

III. ANALYSIS

In answering the legal question raised by these appeals, we acknowledge that the

body of law relevant to these disputes presents a debate between two competing but

colorable views of the law. These cases thus exemplify a benefit of careful employment

of the interlocutory appeal process: to enable this Court to clarify precedent that could

arguably be read in two different ways before litigants incur avoidable costs.

22

See App. to Zhongpin Opening Br. at 541 (Oral Arg‘t Defs.‘ Mot. to Dismiss, July 24, 2014). 23

See Zhongpin, 2014 WL 6735457, at *12 (―Although In re Cornerstone questioned the merit

of forcing disinterested directors to face the same pleading standard as interested fiduciaries in

cases subject to entire fairness, the Court‘s examination of precedent left it with no other

choice.‖). 24

Id. 25

See Zhongpin, 2014 WL 6735457, at *12; Cornerstone, 2014 WL 4418169, at *12.

8

We now resolve the question presented by these cases by determining that

plaintiffs must plead a non-exculpated claim for breach of fiduciary duty against an

independent director protected by an exculpatory charter provision, or that director will

be entitled to be dismissed from the suit. That rule applies regardless of the underlying

standard of review for the transaction. When a director is protected by an exculpatory

charter provision, a plaintiff can survive a motion to dismiss by that director defendant by

pleading facts supporting a rational inference that the director harbored self-interest

adverse to the stockholders‘ interests, acted to advance the self-interest of an interested

party from whom they could not be presumed to act independently, or acted in bad

faith.26

But the mere fact that a plaintiff is able to plead facts supporting the application

of the entire fairness standard to the transaction, and can thus state a duty of loyalty claim

against the interested fiduciaries, does not relieve the plaintiff of the responsibility to

plead a non-exculpated claim against each director who moves for dismissal.27

26

See, e.g., Malpiede, 780 A.2d 1075, 1094 (Del. 2001) (holding that on a motion to dismiss,

―[a] plaintiff must allege well-pleaded facts stating a claim on which relief may be granted. Had

plaintiff alleged such well-pleaded facts supporting a breach of loyalty or bad faith claim, the

Section 102(b)(7) charter provision would have been unavailing as to such claims, and this case

would have gone forward‖); Orman v. Cullman, 794 A.2d 5 (Del. Ch. 2002). 27

See Malpiede, 780 A.2d at 1094; see also Emerald II, 787 A.2d at 92 (citing Malpiede with

approval for the proposition that ―unless there is a violation of the duty of loyalty or the duty of

good faith, a trial on the issue of entire fairness is unnecessary because a Section 102(b)(7)

provision will exculpate director defendants from paying monetary damages that are exclusively

attributable to a violation of the duty of care‖); Emerald I, 726 A.2d at 1224 (―Nonetheless,

where the factual basis for a claim solely implicates a violation of the duty of care, this Court has

indicated that the protections of such a [Section 102(b)(7)] charter provision may properly be

invoked and applied.‖); Arnold v. Soc’y for Sav. Bancorp, Inc., 650 A.2d 1270 (Del. 1994);

Wayne Cnty. Employees’ Ret. Sys. v. Corti, 2009 WL 2219260 (Del. Ch. July 24, 2009), aff’d,

996 A.2d 795 (Del. 2010) (granting defendants‘ motion to dismiss when plaintiffs failed to state

a non-exculpated claim against the director defendants for breach of fiduciary duty); In re Lukens

9

No doubt, the invocation of the entire fairness standard has a powerful pro-

plaintiff effect against interested parties.28

When that standard is invoked at the pleading

stage, the plaintiffs will be able to survive a motion to dismiss by interested parties

regardless of the presence of an exculpatory charter provision because their conflicts of

interest support a pleading-stage inference of disloyalty.29

Indeed, as to the interested

party itself, a finding of unfairness after trial will subject it to liability for breach of the

duty of loyalty regardless of its subjective bad faith.30

Inc. S’holders Litig., 757 A.2d 720, 734 (Del. Ch. 1999), aff’d sub nom., Walker v. Lukens, Inc.,

757 A.2d 1278 (Del. 2000) (same). 28

See, e.g., Mills Acquisition Co. v. Macmillan, Inc., 559 A.2d 1261, 1279 (Del. 1989) (internal

citations omitted) (quoting AC Acquisitions v. Anderson, Clayton & Co., 519 A.2d 103, 111

(Del. Ch. 1986)) (―Obviously, application of the correct analytical framework is essential to a

proper review of challenges to the decision-making processes of a corporate board. [B]ecause

the effect of the proper invocation of the business judgment rule is so powerful and the standard

of entire fairness so exacting, the determination of the appropriate standard of judicial review

frequently is determinative of the outcome of derivative litigation.‖); In re Trados Inc. S’holder

Litig., 73 A.3d 17, 44 (Del. Ch. 2013) (―Entire fairness, Delaware‘s most onerous standard,

applies when the board labors under actual conflicts of interest. Once entire fairness applies, the

defendants must establish to the court‘s satisfaction that the transaction was the product of both

fair dealing and fair price. Not even an honest belief that the transaction was entirely fair will be

sufficient to establish entire fairness. Rather, the transaction itself must be objectively fair,

independent of the board‘s beliefs.‖) (internal citations and quotation marks omitted); Edward P.

Welch, et al., Mergers & Acquisitions Deal Litigation Under Delaware Corporation Law

§ 4.02[A][2] (2014) (―The applicable standard of review can have nearly dispositive

consequences in deal litigation alleging a breach of fiduciary duty. When a decision is made by

a majority of well-informed, disinterested, and independent directors, that decision is generally

protected by the deferential business judgment rule . . . . When the business judgment rule is

overcome, and/or when a controlling stockholder stands on both sides of a challenged

transaction, the courts may apply the more rigorous entire fairness standard of review.‖). 29

See, e.g., Gantler v. Stevens, 965 A.2d 695 (Del. 2009) (holding that the plaintiffs had ―alleged

specific conduct from which a duty of loyalty violation can reasonably be inferred,‖ and thus,

finding that the Court of Chancery had erred in dismissing the relevant counts against the

defendant directors); Kahn v. Lynch Commc’ns Syst., Inc., 638 A.2d 1110, 1115 (Del. 1994). 30

See, e.g., Venhill Ltd. P’ship v. Hillman, 2008 WL 2270488, at *22 (Del. Ch. June 3, 2008)

(―As I understand it, only the self-dealing director would be subject to damages liability for the

gap between a fair price and the deal price without an inquiry into his subjective state of mind.

Why? Because under the traditional operation of the entire fairness standard, the self-dealing

10

The stringency of after-the-fact entire fairness review by the court intentionally

puts strong pressure on the interested party and its affiliates to deal fairly before-the-fact

when negotiating an interested transaction. To accomplish this, the burden of proving

entire fairness in an interested merger falls on the ―the controlling or dominating

shareholder proponent of the transaction.‖31

But applying the entire fairness standard

against interested parties does not relieve plaintiffs seeking damages of the obligation to

plead non-exculpated claims against each of the defendant directors.32

In Malpiede, this Court analyzed the effect of a Section 102(b)(7) provision on a

due care claim against directors who approved a transaction which the plaintiffs argued

should be subject to review under the Revlon standard. This Court noted that although

―plaintiffs are entitled to all reasonable inferences flowing from their pleadings, . . . if

director would have breached his duty of loyalty if the transaction was unfair, regardless of

whether he acted in subjective good faith. After all, that is the central insight of the entire

fairness test, which is that when a fiduciary self-deals he might unfairly advantage himself even

if he is subjectively attempting to avoid doing so.‖); In re PNB Holding Co. S’holders Litig.,

2006 WL 2403999, *22 n.117 (Del. Ch. Aug. 18, 2006) (―I perceive no basis in this trial record

to conclude that the PNB directors intended to deal unfairly with the departing PNB

stockholders; that is, that they in bad faith sought to underpay in the Merger. . . . In other words,

although I find for structural reasons that the directors owed a duty of fair treatment to the

departing minority, and fell short of meeting that duty, I do not find that they fell short out of bad

faith.‖). 31

Lynch, 638 A.2d at 1117 (citing Weinberger v. UOP, Inc., 457 A.2d 701, 710–11 (Del. 1983));

see also Sterling v. Mayflower Hotel Corp., 93 A.2d 107, 110 (Del. 1952) (―Since [the interested

party] stand[s] on both sides of the transaction, they bear the burden of establishing its entire

fairness, and it must pass the test of careful scrutiny by the courts.‖). 32

We focus here on damages because that is the issue before us. The entire fairness doctrine

also has a potent effect in cases where equitable relief, such as rescission, is a viable remedy, but

the existence of a Section 102(b)(7) charter provision might not have the same case-dispositive

effect under those circumstances. See, e.g., London v. Tyrrell, 2010 WL 877528, at *18 (Del.

Ch. Mar. 11, 2010) (―Delaware law permits a suit seeking rescission to go forward despite a

§ 102(b)(7) provision protecting directors against monetary judgments.‖).

11

those inferences do not support a valid legal claim, the complaint should be dismissed.‖33

Because a director will only be liable for monetary damages if she has breached a non-

exculpated duty, a plaintiff who pleads only a due care claim against that director has not

set forth any grounds for relief. In such a case, ―as a matter of law [] then Section

102(b)(7) would bar the claim.‖34

Nevertheless, the plaintiffs in each of these cases contend that their exculpated

claims against the independent directors cannot be dismissed solely because the

transaction at issue is subject to entire fairness review. The plaintiffs argue that they

should be entitled to an automatic inference that a director facilitating an interested

transaction is disloyal because the possibility of conflicted loyalties is heightened in

controller transactions, and the facts that give rise to a duty of loyalty breach may be

unknowable at the pleading stage.35

But there are several problems with such an

inference: to require independent directors to remain defendants solely because the

plaintiffs stated a non-exculpated claim against the controller and its affiliates would be

inconsistent with Delaware law and would also increase costs for disinterested directors,

corporations, and stockholders, without providing a corresponding benefit.

First, this Court and the Court of Chancery have emphasized that each director has

a right to be considered individually when the directors face claims for damages in a suit

33

Malpiede, 780 A.2d 1075, 1094 (Del. 2001). 34

Id.; see also In re Synthes, Inc. S’holder Litig., 50 A.3d 1022, 1032 (Del. Ch. 2012) (―Because

the directors on the Board are protected by the § 102(b)(7) provision exculpating them for

personal liability stemming from a breach of the duty of care, the complaint must be dismissed

against the directors unless the plaintiffs have successfully pled non-exculpated claims for breach

of the duty of loyalty against them.‖). 35

See Cornerstone, 2014 WL 4418169, at *11; Zhongpin Opening Br. at 21-22.

12

challenging board action.36

And under Delaware corporate law, that individualized

consideration does not start with the assumption that each director was disloyal; rather,

―independent directors are presumed to be motivated to do their duty with fidelity.‖37

36

See, e.g., McMullin v. Beran, 765 A.2d 910, 923 (Del. 2000) (―In assessing director

independence, Delaware courts apply a subjective ‗actual person‘ standard to determine whether

a ‗given‘ director was likely to be affected in the same or similar circumstances.‖); Smith v. Van

Gorkom, 488 A.2d 858, 899 (Del. 1985) (denying motion for reargument brought by individual

directors complaining that their individual responsibility was not considered by the Court, but

only because those directors had made no effort earlier in the case to present a defense distinct

from the rest of the board, even though ―a special opportunity was afforded the individual

defendants . . . to present any factual or legal reasons why each or any of them should be

individually treated‖ at oral argument); Chen v. Howard-Anderson, 87 A.3d 648, 677 (Del. Ch.

2014) (quoting In re Emerging Commc’ns S’holders Litig., 2004 WL 1305745, at *38 (Del. Ch.

May 3, 2004) (―The liability of the directors must be determined on an individual basis because

the nature of their breach of duty (if any), and whether they are exculpated from liability for that

breach, can vary for each director.‖); In re S. Peru Copper Corp. S’holder Derivative Litig., 52

A.3d 761, 787 n.72 (Del. Ch. 2011) (―The entire fairness standard ill suits the inquiry whether

disinterested directors who approve a self-dealing transaction and are protected by an

exculpatory charter provision authorized by 8 Del. C. § 102(b)(7) can be held liable for breach of

fiduciary duties. Unless there are facts suggesting that the directors consciously approved an

unfair transaction, the bad faith preference for some other interest than that of the company and

the stockholders that is critical to disloyalty is absent. The fact that the transaction is found to be

unfair is of course relevant, but hardly sufficient, to that separate, individualized inquiry.‖), aff’d

sub nom., Americas Mining Corp. v. Theriault, 51 A.3d 1213 (Del. 2012); Steinman v. Levine,

2002 WL 31761252, *15 n.81 (Del. Ch. Nov. 27, 2002) (holding that a plaintiff ―is required to

identify specific acts of individual defendants . . . for his claim to survive‖), aff’d, 822 A.2d 397

(Del. 2003); Shandler v. DLJ Merchant Banking, Inc., 2010 WL 2929654, *12 (Del. Ch. July 26,

2010) (assessing allegations against directors separately to determine whether the complaint

stated a non-exculpated claim for relief); 5 Charles A. Wright & Arthur R. Miller, Federal

Practice and Procedure § 1248 (3d ed. 2015) (―[I]n order to state a claim for relief, actions

brought against multiple defendants must clearly specify the claims with which each individual

defendant is charged.‖). 37

In re MFW S’holders Litig., 67 A.3d 496, 528 (Del. Ch. 2013) (―Although it is possible that

there are independent directors who have little regard for their duties or for being perceived by

their company‘s stockholders (and the larger network of institutional investors) as being effective

at protecting public stockholders, the court thinks they are likely to be exceptional, and certainly

our Supreme Court‘s jurisprudence does not embrace such a skeptical view.‖), aff’d sub nom.,

Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014); see also Beam ex rel. Martha

Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1048 (Del. 2004) (―[D]irectors are

entitled to a presumption that they were faithful to their fiduciary duties.‖); Aronson v. Lewis,

473 A.2d 805, 815 (Del. 1984); Robinson v. Pittsburgh Oil Ref. Corp., 126 A. 46, 48 (Del. Ch.

1924) (―[T]he sale in question must be examined with the presumption in its favor that the

13

Thus, in Aronson v. Lewis, this Court emphasized that the mere fact that a director serves

on the board of a corporation with a controlling stockholder does not automatically make

that director not independent.38

This Court has similarly refused to presume that an

independent director is not entitled to the protection of the business judgment rule solely

because the controlling stockholder may itself be subject to liability for breach of the duty

of loyalty if the transaction was not entirely fair to the minority stockholders.39

Adopting the plaintiffs‘ approach would not only be inconsistent with these basic

tenets of Delaware law, it would likely create more harm than benefit for minority

stockholders in practice.40

Our common law of corporations has rightly emphasized the

directors who negotiated it honestly believed that they were securing terms and conditions which

were expedient and for the corporation‘s best interests.‖). 38

See, e.g., Aronson, 473 A.2d at 815 (―[E]ven proof of majority ownership of a company does

not strip the directors of the presumptions of independence, and that their acts have been taken in

good faith and in the best interests of the corporation. There must be coupled with the allegation

of control such facts as would demonstrate that through personal or other relationships the

directors are beholden to the controlling person.‖). 39

See S. Peru, 52 A.3d at 785 (Del. Ch. 2011) (determining, after trial, that the controller and its

affiliated directors were liable for damages because the interested transaction at issue was not

entirely fair to the minority stockholders, even though the independent directors had properly

been dismissed on summary judgment ―because the plaintiff had failed to present evidence

supporting a non-exculpated breach of their fiduciary duty of loyalty‖); see also Aronson, 473

A.2d at 816 (holding ―that in the demand-futile context a plaintiff charging domination and

control of one or more directors must allege particularized facts,‖ i.e., specific facts that each

director was violating their duty of loyalty, to rebut the protection of the business judgment rule). 40

It also seems unlikely that the rule we embrace today will create any problem of under-

compensation for minority stockholders who challenge controller transactions. Interested

fiduciaries, often the proverbial deep-pocketed defendants, will continue to be required to prove

that the transaction was entirely fair to the minority stockholders, because the plaintiffs‘ well-

pled claims against the interested parties in a controller transaction cannot be dismissed before

trial, regardless of whether the independent directors remain as defendants. And if plaintiffs do

not have sufficient evidence to plead non-exculpated claims against the independent directors at

the pleading stage, they may bring such claims later. Because most transactions are brought

immediately after—or even before—the announcement of the challenged, but still typically

unconsummated, transaction, plaintiffs will usually have ample time to bring well-pled claims

that the independent directors breached their duty of loyalty within the three-year statute of

14

need for independent directors to be willing to say no to interested transactions proposed

by controlling stockholders.41

For that reason, our law has long inquired into the

practical negotiating power given to independent directors in conflicted transactions.42

Although it is wise for our law to focus on whether the independent directors can say no,

it does not follow that it is prudent to create an invariable rule that any independent

director who says yes to an interested transaction subject to entire fairness review must

remain as a defendant until the end of the litigation, regardless of the absence of any

evidence suggesting that the director acted for an improper motive.

For more than a generation, our law has recognized that the negotiating efforts of

independent directors can help to secure transactions with controlling stockholders that

are favorable to the minority.43

Indeed, respected scholars have found evidence that

interested transactions subject to special committee approval are often priced on terms

limitations period. See 10 Del. C. § 8106; see also Elliott J. Weiss & Lawrence J. White, File

Early, Then Free Ride: How Delaware Law (Mis)shapes Shareholder Class Actions, 57 VAND.

L. REV. 1797, 1827 (2004) (finding that the large majority of transactions are challenged within

two days of announcement and before consummation). 41

See, e.g., In re MFW S’holders Litig., 67 A.3d at 518 (―To the extent that the fundamental rule

is that a special committee should be given standard-influencing effect if it replicates arm‘s-

length bargaining, that test is met if the committee is independent, can hire its own advisors, has

a sufficient mandate to negotiate and the power to say no, and meets its duty of care.‖); see also

Kahn v. Lynch Commc’n Sys., Inc., 638 A.2d 1110, 1119 (Del. 1994) (quoting In re First Boston,

Inc. S’holders Litig., 1990 WL 78836, at *15–16 (Del. Ch. June 7, 1990)) (―The power to say no

is a significant power. It is the duty of directors serving on [an independent] committee to

approve only a transaction that is in the best interests of the public shareholders, to say no to any

transaction that is not fair to those shareholders and is not the best transaction available.‖). 42

E.g., Kahn v. Tremont Corp., 694 A.2d 422, 429 (Del. 1997). 43

Weinberger v. UOP, Inc., 457 A.2d 701, 709 n.7 (Del. 1983) (―Although perfection is not

possible, or expected, the result here could have been entirely different if UOP had appointed an

independent negotiating committee of its outside directors to deal with Signal at arm‘s length.‖).

15

that are attractive to minority stockholders.44

We decline to adopt an approach that

would create incentives for independent directors to avoid serving as special committee

members, or to reject transactions solely because their role in negotiating on behalf of the

stockholders would cause them to remain as defendants until the end of any litigation

challenging the transaction.45

As is well understood, the fear that directors who faced personal liability for

potentially value-maximizing business decisions might be dissuaded from making such

decisions is why Section 102(b)(7) was adopted in the first place. As this Court

explained in Malpiede, ―Section 102(b)(7) was adopted by the Delaware General

44

See, e.g., Thomas W. Bates, Michael L. Lemmon, & James S. Linck, Shareholder Wealth

Effects and Bid Negotiation in Freeze-out Deals: Are Minority Shareholders Left Out in the

Cold?, 81 J. FIN. ECON. 681, 706 (2006) (reporting evidence to support the hypothesis that

―active board representation and implicit legal recourse‖ benefit stockholders in the tender offer

context); Guhan Subramanian, Fixing Freezeouts, 115 YALE L.J. 2, 25 (2005) (discussing the

role of ―vigorous bargaining‖ by special committees in increasing premiums for minority

stockholders in merger freezeouts, compared to tender offer freezeouts effected without special

committees); James F. Cotter, Anil Shivdasani, & Marc Zenner, Do Independent Directors

Enhance Target Shareholder Wealth During Tender Offers?, 43 J. OF FIN. ECON. 195 (1997)

(finding that, in the context of a tender offer, the presence of an independent board increases the

tender offer bid premium and overall stockholder gains). 45

Such an approach might also provide incentives for a controlling stockholder to proceed by

means of a tender offer to the minority stockholders, and thus potentially avoid the need to

actively negotiate with a special committee. See generally In re Siliconix Inc. S’holders Litig.,

2001 WL 716787 (Del. Ch. June 19, 2001) (holding, under its reading of Solomon v. Pathe

Commc’ns Corp., 672 A.2d 35 (Del. 1996), and other similar cases, that a going-private tender

transaction made by way of a tender offer is not subject to entire fairness review); but see In re

Cox Commc’ns, Inc. S’holders Litig., 879 A.2d 604, 646 (Del. Ch. 2005) (suggesting that the

equitable standard to review fiduciary conduct in the context of tender offer transactions should,

if possible, be aligned with the equitable standard of review for controller-going-private

transactions consummated by merger). Empirical evidence exists suggesting that going-private

tender offers are priced less favorably to stockholders than interested-party transactions

negotiated and approved by special committees of independent directors. See Guhan

Subramanian, Post-Siliconix Freeze–Outs: Theory and Evidence, 36 J. LEGAL STUD. 1 (2007)

(reporting, based on a database of all freeze-outs of Delaware targets executed in the four years

after the Court of Chancery decided Siliconix, that controlling stockholders pay less, on average,

to minority stockholders in tender offer freeze-outs than in merger freeze-outs).

16

Assembly in 1986 following a directors and officers insurance liability crisis and the

1985 Delaware Supreme Court decision in Smith v. Van Gorkom.‖46

Because of that

―crisis,‖ the General Assembly feared that directors would not be willing to make

decisions that would benefit stockholders if they faced personal liability for making them.

The purpose of Section 102(b)(7) was to ―free[] up directors to take business risks

without worrying about negligence lawsuits.‖47

Establishing a rule that all directors must

remain as parties in litigation involving a transaction with a controlling stockholder

would thus reduce the benefits that the General Assembly anticipated in adopting Section

102(b)(7).

We understand that the plaintiffs, and certain members of the Court of Chancery,

have read the decisions this Court issued in the complex circumstances of the Emerald

Partners litigation to support a different conclusion than we reach here. But the Court in

Emerald Partners was focused on a separate question; namely, whether courts can

consider the effect of a Section 102(b)(7) provision before trial when the plaintiffs have

pled facts supporting the inference not only that each director breached not just his duty

of care, but also his duty of loyalty, when the applicable standard of review of the

underlying transaction is entire fairness. 48

In that circumstance, the Court held that the

46

780 A.2d 1075, 1095 (Del. 2001) (citing Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985)). 47

Id.; see also Prod. Res. Grp., LLC v. NCT Grp., Inc., 863 A.2d 772, 777 (Del. Ch. 2004) (―One

of the primary purposes of § 102(b)(7) is to encourage directors to undertake risky, but

potentially value-maximizing, business strategies, so long as they do so in good faith.‖). 48

In the Emerald Partners litigation, the plaintiffs brought a derivative and class action suit

following the corporation‘s merger with its controlling stockholder, alleging that the merger was

not entirely fair and that the defendant directors violated disclosure rules. The defendants did not

move to dismiss, but moved for summary judgment after discovery. The Court of Chancery

granted that motion, concluding that the plaintiff‘s allegations supported a duty of care violation

17

determination of whether any failure of the putatively independent directors was the

result of disloyalty or a lapse in care was best determined after a trial, because the

substantive fairness inquiry would shed light on why the directors acted as they did.49

The sentence in Emerald II that the plaintiffs claim is dispositive here must be understood

in that context, as referring to a case where there was a viable, non-exculpated loyalty

claim against each putatively independent director. The Emerald Partners litigation thus

did not answer the specific question at issue in these appeals, whether the application of

the entire fairness standard requires the Court of Chancery to deny a motion to dismiss by

independent directors even when the plaintiffs may not have sufficiently pled a non-

exculpated claim against those directors. Indeed, much of the language in the Emerald

Partners decisions issued by this Court is consistent with the answer we reach here. For

example, this Court observed in Emerald II that:

The rationale of Malpiede constitutes judicial cognizance of a practical

reality: unless there is a violation of the duty of loyalty or the duty of good

faith, a trial on the issue of entire fairness is unnecessary because a Section

102(b)(7) provision will exculpate director defendants from paying

monetary damages that are exclusively attributable to a violation of the

duty of care. The effect of our holding in Malpiede is that, in actions

against the directors of Delaware corporations with a Section 102(b)(7)

at most, and that the company‘s Section 102(b)(7) charter provision exculpated the defendants

from liability. See Emerald Partners v. Berlin, 1995 WL 600881, *1 (Del. Ch. Sept. 22, 1995).

This Court reversed, holding that several issues remained that implicated the independent

directors‘ duty of loyalty, including the plaintiff‘s claim that the directors had misrepresented

that negotiations were arm‘s-length in the proxy statement. See Emerald I, 726 A.2d at 1223.

Because ―the entire fairness and disclosure claims under [those] circumstances were

intertwined,‖ the defendants could not invoke § 102(b)(7) at that stage of the proceedings. Id. In

other words, this Court found that the plaintiffs had successfully shown that issues of fact

remained that implicated the independent directors‘ duty of loyalty, and because those issues

were not separable from the factual issues about whether the transaction was fair, the

independent directors‘ motion for summary judgment was properly denied. 49

See Emerald I, 726 A.2d at 1218.

18

charter provision, a shareholder‘s complaint must allege well-pled facts

that, if true, implicate breaches of loyalty or good faith.50

Thus, to the extent that other isolated statements in Emerald Partners could be

interpreted as inconsistent with the result we reach today, we clarify that the Emerald

Partners decisions should be read in their case-specific context and not for the broad

proposition that the plaintiffs advocate. The reading of the Emerald Partners decisions

we embrace is also the one adopted by the Court of Chancery itself in DiRienzo v.

Lichtenstein.51

In that case, the Court of Chancery recognized that the Emerald Partners

decisions had to be read in the context of their facts, where there was sufficient record

evidence to attribute any lack of effectiveness in the putatively independent directors‘

handling of the transaction to either a breach of the duty of loyalty (e.g., as the result of

bad faith) or a lack of care. The Court of Chancery thus observed that ―the directors in

Emerald Partners were precluded from relying on a 102(b)(7) charter provision by virtue

of their conduct, not because the transaction was subject to entire fairness review for

other reasons.‖52

In other words, DiRienzo interpreted the Emerald Partners decisions as

standing for the mundane proposition that a defendant cannot obtain dismissal on the

basis of an exculpatory provision when there is evidence that he committed a non-

exculpated breach of fiduciary duty.53

50

Emerald II, 787 A.2d at 92. 51

2013 WL 5503034 (Del. Ch. Sept. 30, 2013), appeal refused, 80 A.3d 959 (Del. 2013). 52

Id. at *11. 53

We note this, not to fault those who read the complicated Emerald Partners decisions

differently than we now do or DiRienzo did, but to emphasize that our ultimate duty is to give

those cases the most reasonable reading we can, based on their full context. See In re MFW

S’holders Litig., 67 A.3d 496, 524 (Del. 2013) (―Admittedly, there is broad language in each of

these decisions, and in some other cases, that can be read to control the question asked in this

19

Thus, when a complaint pleads facts creating an inference that seemingly

independent directors approved a conflicted transaction for improper reasons, and thus,

those directors may have breached their duty of loyalty, the pro-plaintiff inferences that

must be drawn on a motion to dismiss counsels for resolution of that question of fact only

after discovery.54

By contrast, when the plaintiffs have pled no facts to support an

inference that any of the independent directors breached their duty of loyalty, fidelity to

the purpose of Section 102(b)(7) requires dismissal of the complaint against those

directors. Accordingly, we reverse the judgments of the Court of Chancery denying the

independent directors‘ motions to dismiss, and remand each case for the Court of

Chancery to determine if the plaintiffs have sufficiently pled facts suggesting that the

independent directors committed a non-exculpated breach of their fiduciary duty.

case. But this, like all judicial language, needs to be read in full context, as our Supreme Court

itself has emphasized.‖), aff’d sub nom., Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del.

2014). 54

By parity of reasoning, if after discovery, there is evidence from which a fact-finder could

conclude that the independent directors breached their duty of loyalty, a trial is necessary to

determine the directors‘ liability.